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The Value of the CEO Variety Pack

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom LineA chief executive with a diverse background usually brings innovation and new ideas to a company, but the shake-up doesn’t necessarily pay off.

CEOs who have had a wide variety of career experiences bring a higher level of strategic change, a more distinctive approach, and better resource allocation to their firms, according to a new study of top executives at Fortune 250 companies. The findings help explain why some firms seem to be dogged by inertia, while others display the flexibility and unique vision that set them apart from the competition. However, there may also be a downside to hiring a CEO who jumps ship too often, as strategic change does not necessarily lead to a more robust bottom line, the authors found.

Throughout much of the post–World War II era, CEOs typically rose through a single department until selected for general management at the firm where they’d worked for their whole career. By the 1980s, however, the “professional manager” started to emerge: Increasingly encouraged to work in different areas and across departments, these managers arrived in the executive suite with an array of general skills that could be tapped in many different ways—to the benefit of many different companies.

As a result, firms have expanded their hiring of outsider CEOs with multifaceted backgrounds. Before James McNerney became the CEO of Boeing, for example, he worked at a range of companies, including Procter & Gamble, General Electric, and 3M. The old model still persists in some quarters— ExxonMobil’s CEO Rex Tillerson joined the firm as an engineer in 1975 and gradually worked his way up the corporate ladder. And many CEOs are hybrids of the two models.

To explore how a CEO’s career diversity affects a firm’s strategic direction, the authors analyzed the career paths and subsequent actions of almost 200 CEOs who were appointed in recent years at some of the largest public companies in the United States. These CEOs were tracked for five years after their appointment, or until they left the firm. 

Career variety could mean having a number of different job titles within the same company, working at several companies, moving across industries, or a combination of all three. High-variety executives accumulate vast portfolios of new experiences during their careers, while CEOs with less career variety have narrower, but more focused, histories to draw on.

These differences should manifest themselves through the CEOs’ personalities and business outlooks, the authors posit. High-variety CEOs typically champion change and experimentation, whereas their counterparts with less motley backgrounds generally prefer more conservative adjustments and overall stability. The choice to change fields or remain within one line of work can be driven by any number of factors—including personal whims, family circumstances, or salary considerations—but the decision can nevertheless inform how a CEO confronts challenges or exploits opportunities.

The study showed that CEOs with more career variety steered their firms in novel strategic directions, engendering change and helping their companies devote resources more efficiently to projects that bucked industry trends. And there are practical implications: A firm that transitioned from a CEO whose career variety fell slightly below the mean to one slightly above the mean saw an average increase of 37 percent in resource reallocation—in the authors’ sample, that equates to an annual shift of US$34 million in advertising costs and $149 million in administrative, general, and sales expenditures.

However, the high-variety CEOs also presided over companies with more comings and goings in the executive suite, and with top management teams that were no more diverse in terms of age, education, gender, or tenure than those led by their low-variety colleagues. The authors conclude that these CEOs prefer to promote novel thinking by consistently “churning” through their top managers, but seem to regard diversity as less important because they can presumably get different opinions from the myriad other sources they’ve encountered during their wide-ranging careers.

High-variety CEOs prefer to promote novel thinking by “churning” through their top managers.

The findings imply that boards of directors should carefully weigh a candidate’s career breadth when appointing a new CEO. Directors concerned that their firm has fallen into a rut might want to seek out a CEO with a versatile background, one more likely to champion sweeping reforms that break with conventional thinking. But if a board feels that the company’s strategy is all over the map, a CEO with a narrow range of industry experiences might provide the steady hand required.

Career variety, in itself, is not necessarily an asset. Some CEOs may hop from job to job because they’ve failed at previous stops, or because of personal issues that have nothing to do with their business. What’s more, high-variety CEOs could simply shake up companies as a matter of course, reshuffling top managers regardless of whether the firms really need new blood.

Finally, the authors conducted a supplemental analysis that suggested the strategic change delivered by CEOs with wide-ranging backgrounds does not necessarily translate into higher profits for their firms. What it does guarantee, however, is that those companies should buckle up for a bumpy ride: high-variety CEOs consistently oversaw periods of volatile performance, laced with wild swings, high risks, and huge opportunities. 

Source: CEO Career Variety: Effects on Firm-Level Strategic and Social Novelty, Craig Crossland (University of Notre Dame), Jinyong Zyung (Rice University), Nathan J. Hiller (Florida International University), and Donald C.  Hambrick (Pennsylvania State University), Academy of Management Journal, Jun. 2014, vol. 57, no. 3

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The Value of the CEO Variety Pack